WSJ article: _and_quot;SEC Said To Lack Power To Exempt..._and_quot; 1457

  • SEC Said To Lack Power To Exempt Small Firms From Sarb-Ox
    March 30, 2006 12:41 p.m.
    WASHINGTON – The Securities and Exchange Commission can’t exempt small U.S. public companies from a requirement to assess internal controls over financial reports annually, a group of securities lawyers say.
    Congress called for public companies to examine their controls each year, with further review by their outside auditors, and alert investor to any major problems. The requirement, established in the 2002 Sarbanes-Oxley Act, has yet to take effect for small U.S. firms, and a small business advisory group has recommended the SEC exempt the tiniest public companies from it, and permit others to conduct a self-assessment only, sparing them the expense of additional audit costs.
    Duke University Law School professor James Cox and 19 other law professors said the SEC cannot and should not do that. In a March 21 letter to SEC Chairman Christopher Cox, the law professors said the internal-controls provision is a standalone part of the 2002 law, preventing the SEC from offering exemptions, a power it has under older securities laws. The professors said that approach shows Congress intended to block exemptions and have all public companies scrutinize internal controls.
    While the SEC cannot exempt smaller companies from the internal-controls requirement, the law professors suggested it can tailor it so it is workable for smaller firms with fewer resources.
    ‘They need to have a balanced approach,’ Duke’s professor Cox said in a telephone interview Thursday. He said there are plenty of benefits to having strong internal controls, especially for smaller companies, which he said ‘have higher incidences of fraud’ than larger ones. He said the SEC shouldn’t waive internal-controls reviews by companies or their auditors, but ought to offer ways for them to do it cost-effectively, and give them plenty of time to gear up, perhaps by deferring the requirement for another three to five years.
    As you know, the jury is still out on the SOx fate for non-accelerated filers. However, it’s interesting that Professor Cox (no relation to SEC Chairman Cox) suggests an extension of ‘3 to 5 years’. I can just imagine the SEC telling companies that they have another extension, but they really, really mean it (this time).

  • Yet another extension would be very much unfortunate. What about all those poor SOXERS who are burning their brains out. Either SEC exempts these small companies or it continues to impose 404 reqmts on them.
    Extensions are taking away the focus that SOX teams generate withing organisations.
    May God give brain to SEC.

  • Where smaller firms are currently required to report, they should start preparing now. Hopefully, they can adopt the most beneficial control practices using the 80/20 rule. If they gradually phase into the process, they’ll have a head start on this process later and there won’t be radical changes in work flows or documentation that could disrupt business operations.
    If SOX requirements didn’t materialize for a while for small companies, they would still be better served in meeting internal/external audit requirements and have more accurate results to present to investors.

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